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STC Chennaimetro
Financial Planning
Youth
• Income (Revenue)
• Needs (Expense)
8
PRIORITY OF PEOPLE
Mutual Funds,
Bonds & Shares
Liquidity:
Fixed Deposits, Small Savings
Mutual Funds,
Bonds & Shares
Wants:
-Perceived as important to
Esteem satisfy ego
-Sell “greed” – Show them
Social how your product will
enhance their lives, get them
more they require.
Safety Needs:
-Perceived as necessary to survival
Physiological
-Sell “fear” – Show them how your product will avoid a
loss or reduce their pain
Life Insurance-
It can be used for a number of needs —
including
family protection,
business planning,
supplemental income and
estate and charitable planning.
LIC
A person has to play many roles and each role entails different emotions.
When the person is not there, he leaves a vacuum, this vacuum is both
EMOTIONAL as well as ECONOMIC
E.g.. – the vacuum of a husband for a wife can not be replaced
similarly the vacuum of a father can not be made good by another person
.
WHAT IS HLV?
Each person’s worth can be measured economically as
he is an Estate for the family. ( HLV )
The vacuum of economic needs created by the absence of the
bread winner can be made good through the concept of life
insurance but emotional gap will exist forever.
“Human Life Value” is that amount which ensures that the
standard of living of a family is not affected even if the earning
member is not there or not able to earn.
With the increase in earnings & Price rise (Inflation) the HLV of
bread-winner goes up and the necessity to review and increase
Life Insurance Cover arises.
OBJECT OF LIFE
INSURANCE
1 Whole Life 5-15 7,899 2,00,000 2,00,000 5,55,600 6,40,000 2778 + 3200
1 Whole Life 5-15 8,889 2,00,000 2,00,000 5,39,300 6,40,000 2696.50 + 3200
1 Whole Life 5-15 10,082 2,00,000 2,00,000 5,16,500 6,40,000 2582.50 + 3200
3 Market Plus- I 191-20 5,000 1,00,000 Fund Value NAV 13.5 EXPC GR
30
..\..\My Documents\DispIncome.xls
Attempt to Generate Surplus
Confidential
let’s understand how money
works better
So that we don’t get into debt trap
Learning Outcomes
• This session covers concepts related to Time Value of Money using
• MS-Excel. By the end of the course the participant should be able to:
Confidential
Introduction to TVM Calculations
Using MS -Excel
TVM Terminology & Notations in MS Excel:
• Draw timeline for a TVM problem to identify the correct cash flow timing.
• End of one period is the beginning of another period.
• Use Discounting method to calculate PV and Compounding method for FV.
• Cash outflows (payments) are assigned a negative (-) sign while cash inflows
are assigned positive sign (+).
Confidential
Cash Flow Sign Convention
Excel Example:
• The Cash Flow Sign Convention signifies A bond pays a coupon of 20% annually with
the direction of the cash flow in a TVM interest paid quarterly. The bond’s duration
is five years. The Yield is 25%. Find its
problem. current price assuming Face Value of 1000.
Payment (PMT)
Present +/ - Future
Always use a Positive (+) sign for all
Value (PV) 100 200 300 400 500 Value (FV) cash Inflows and use a Negative (-)
+/- -/+ sign for all cash Outflows regardless of
0 1 2 3 4 5
their timing (PV or FV).
Confidential
Present Value (PV)
• “The current worth of future sum of money or stream of cash flows
• given a specified rate of return.”
FV
PV =
(1+RATE/N)NPER
Calculating PV in MS Excel:
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Solving for PV:
The concept
• Solve the general FV equation for PV:
– PV = FVn / ( 1 + i )n
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What is the present value (PV) of Rs.100 due in 3
years, if interest rate = 10%?
• Finding the PV of a cash flow or series of cash
flows when compound interest is applied is
called discounting (the reverse of compounding).
• The PV shows the value of cash flows in terms
of today’s purchasing power.
0 1 2 3
10%
PV = ? 100
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Future Value (FV)
• “The value of an asset or cash at a specified date in the future that
• is equivalent in value to a specified sum today”
FV = PV x (1+RATE/N)NPER
Calculating FV in MS Excel:
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Solving for FV:
The Concept
• After 1 year:
– FV1 = PV ( 1 + i )
– After 2 years:
• FV2 = PV ( 1 + i )2
– After 3 years:
• FV3 = PV ( 1 + i )3
Answer:
If interest rate is ‘r’ then it will require 72/r years to double
the money
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Apply rule of 72!
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Applying the rule of 72!
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If Ashish has been regularly investing
Rs.10,000 at the beginning of every year
for the past 10 years, into an investment
earning 10 % rate of return, what is the
value of the investment now?
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What you should really know
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Time lines
0 1 2 3
i%
0 1 2
i%
0 1 9 10
i% =10%
Length of the period = 1 year
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After drawing the timeline
• Understand what is to be computed
– Is it FV (Future Value)? (Value at the end of the last tick)
– Is it PV (Present Value) (Value at the beginning of the first tick)
– Is it PMT (equated payments) (value happening at every tick)
– Is it NPER (Periods required to create certain sum of money or
repay loan? (number of gaps between ticks)
– Is it rate (to find the rate of interest you are paying or receiving)?
(the interest rate normalised based on the length of the period)
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What is to be calculated?
0 1 9 10
i% =10%
Length of the period = 1 year
-10000 -10000 ?
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What is the future value (FV) of yearly investment of
Rs 10000 after 10 years invested at the beginning of
every year, if interest rate is = 10%?
• So, what we need to find is FV…
– What we have is
• PV = which is payment at the beginning of the period 0
• NPER = 10 (10 years)
• Rate = 10%
• PMT = -10000 (equal payments going out of pocket at every
tick)
• Note: here we need to understand “Type” which is nothing but
if the outflow or inflow is happening at beginning of the
period is “1” and inflow or out flow happening at end of the
period is “0” Confidential
Solving for FV
• Using the XL Spread Sheet
– Use ‘FV’ function
– rate = 10%
– nper = 10
– Pmt = -1000
– PV = 0
– Type = 1 (since it is in the beginning of the period)
• Ans: Rs 175,310
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Let’s solve
• Steps involved
– Draw the time line
– How many ticks ?
• 49 ticks – 0 to 48 (This is nothing but NPER)
– Value at the beginning of the tick “0” (PV)
– Value at the beginning of the every tick till 48th tick (-2000), this is
nothing but “PMT”
– What is the interest rate normalized to length of the period? “RATE”
= 8%/12 =0.0067%
– What is type ? “Type = 0” since payment is at the end of the period
• Let’s find out FV using spread sheet
– Answer: 1,12,700
Confidential
What is the PV of this uneven
cash flow stream?
0 1 2 3 4
10%
Confidential
Use NPV
• Rate: 10%
• Value 1: 100
• Value 2: 300
• Value 3: 300
• Value 4: -50
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The Power of Compound Interest
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Frequency of Compounding
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Effective Interest Rate
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‘PMT’ - Function
Confidential
Ravi Sharma has lent his brother
40,000. The loan is to be paid in
annual equal instalments over the
next five years at an annual
interest rate 8%. What is the
amount that Ravi Sharma will
receive at the end of each year?
Confidential
Let’s solve
• Steps
– Draw time line
– How many ticks ? 0,1,2,3,4,5
– What is the duration of each tick ? “yearly”
– What is the value occurring at the beginning of tick
“0”: Rs 40,000
– What is the value occurring at tick 5 : 0
– What is the normalized interest rate: 8%
– What is the payment occurring at every tick ? Don’t
know and this is what we need to find..
Confidential
EMI Calculation
• Use PMT
– Rate: 8%
– Nper: 5
– PV : 40000
– FV: 0
– Type:0
– Answer: 10,018
Confidential
Summary
• Rule of 72
• Understanding of PV, FV, NPER, RATE, PMT
• Power of compounding
• Solving for money problems
– Draw time line
– Find out no. of ticks (NPER = no.of ticks-1)
– Payment happening at beginning of the tick, at each
tick, at the end of each tick (at the beginning PV, at
each tick PMT, at the end of the tick FV)
– Type
– Interest rate normalized to duration of each period
Confidential
When to use which formula
• Present Value
– To calculate the lump sum amount you need to invest today to meet some goal in
the future
– To calculate the loan outstanding as of today for which you are paying a monthly
installment
• Future Value
– To calculate the total amount that you will receive after some time
• The amount can be invested either lump sum or equal amount every month
– To calculate cost of your living or maintenance expenses at a future date adjusting
for inflation
• Net Present Value
– Today’s Value of uneven cash flows which will be received every year in the future
• PMT
– Equated monthly instalments for loans taken
– Equated monthly investments required to meet a financial goal
Confidential
CAPITAL NEED ANALYSIS